Growth picked up slightly in the second quarter of this year to 0.9% from the very soggy 0.5% in the first quarter, which was at the top of the range of predictions, but is, in effect, still a stagnation rate.

The result was anticipated by analysts, who pointed out that the economy’s core sectors were doing better than expected over the summer, but the economy is still spluttering.

The economy is supposed to get a shot in the arm from the RUB27 trillion spending programme on the 12 national projects that is now in effect, but the launch of the programme is off to a very slow start: as of the second quarter only 20% of the planned spending had been disbursed. The responsible ministries and agencies are still struggling to identify the best projects and work out detailed plans on which to start work.

The lacklustre performance is reflected in industrial production, which expanded by 2.8% in July but when adjusted for calendar effects was actually a 0.4% contraction. A similar result was recorded in the IHS Markit Russia Manufacturing Purchasing Index (PMI) result which improved slightly in August to 49.1, but that is still below the 50 no-change mark and represents a contraction.

Having said that, business remains optimistic about the out look for the rest of the year. Unemployment is low and inflations has also been retreating, falling to 4.6% in July. After inflation fell to post Soviet record low of 2.3% last year, it rose at the start of this year to top 5%, spurred by a 2pp hike to VAT to 20%. But the inflationary bump from the tax hike has worn off faster than expected and now the Russian economy is on course to get back to the Central Bank of Russia (CBR) 4% inflation target level by the end of the year.

Falling inflation means the CRR has room to cut rates that will support growth. The central bank has already cut rates once and will cut at least one more time this year if not two.

Growth remains almost entirely driven by consumption and as real incomes growth remains at zero or slightly below the spending is funded by increased consumer borrowing, which has been growing at 25% pa. This has sparked a debate in the government which is divided over how to deal with consumer borrowing, but it likely the CBR will act to head of the appearance of bubble by applying tougher prudential measures on consumer borrowing.

In the meantime the banking sector has returned to clear profit and is making more money than at any time in the last five years. The same is true of corporate profits which are gathering momentum.

Retail has also recovered somewhat thanks to the consumer borrowing, but all the gains have been funded by debt. Online retail, however, continues to boom with the sector growing by over 20% pa. A fight has broken out amongst the leading players who are all seeing sales growing by 60-80% a year, which is likely to continue for several years. E-commerce only accounts for 4.5% of retail turnover at the moment, but will continue to double its share every two years or so for the foreseeable future.

The housing and construction markets are also recovering. In residential housing purchases are being funded by mortgage borrowing as the interest rates continue to fall and are currently around 10%, but will fall further in next few years. Construction has not grown to the point where it has become an economic driver but again the leading companies have benefited.

In general the last years of crisis have caused an across the board consolidation in almost all sectors that has lead to improved efficiency and profitability at the microeconomic level.

When coupled with the large dividend payments – Russian companies are still paying double the amount of dividends to the rest of the MSCI EM index average – Russian stocks have pulled in portfolio investors are the market is up some 30% YTD making the Russian stock market one the best performing in the world.

The bond market, especially the Russian Ministry of Finance ruble-denominated OFZ treasury bills, have also attracted investors attention after the US Federal Reserve bank made it clear it has reversed its tightening policy. Foreigner now hold 30% of outstanding OFZ – a sharp reversal after the sanctions-inspired sell off in the second half of last year.

The upshot is the Ministry of Finance has managed to fulfil around three quarters of its full year borrowing programme in the first six months of this year and has begun to scale back on issues and drive yields down. While yields on OFZ broke through to 9% during the sell off, by August this year they had dropped below the 7% mark.

The Ministry of Finance is flush with money and running a comfortable 2% of GDP surplus on the bank of the bond issues and improved tax collection.

One the political front a series of Moscow opposition protests became violent when the state sent the OMON riot police in apparently with specific orders to beat protestors up in the hope of dissuading more. At the largest (sanctioned) rally more than 60,000 Muscovites took the street to protest, suggesting the violent tactics had backfired. However, the protests remain small and unrest has been limited to the capital. Russians in the regions have become more vocal, but they protest only over specific local issues like landfills and parks.

On the international stage there are clear signs of a thaw with the west. The US imposed the awaited second round of Skripal sanctions, that were purely symbolic in nature and imposed a few restrictions on Russian sovereign bond issues on the primary market, but nothing that is going to lose anyone any money.

With German Chancellor Angela Merkel on the way out French President Emmanuel Macron has become more active and called for a détente with Russia. He seems to have taken up the issue of bring peace about between Russia and Ukraine as his international legacy issue and has been actively courting the Kremlin. While this is unlikely to bring about an end to sanctions the inflows into the capital markets are an obvious early winner.